Top Health Care Short-Squeeze Plays

These heavily shorted stocks have the potential to climb on any positive catalyst.

Health care stocks generally have underperformed most other sectors during the last year or two. This underperformance could offer an opportunity for short-squeeze plays from heavily shorted biotechnology, health facilities, pharmaceutical and medical equipment stocks.

A short squeeze takes place when a stock's short-sellers are forced to cover their positions quickly when the stock they are betting against starts climbing on positive news. As the short-sellers are forced to cover, the price of the stock often moves even higher.

The metric for measuring short-squeeze plays is the short ratio, which represents the number of days it would take a stock's short sellers to cover their positions based on the stock's recent average daily trading volume.

Stockpickr has compiled the Top Health Care Short-Squeeze Plays, a list of heavily shorted stocks in the sector that have the potential to climb higher on any positive catalyst.

One of the most heavily shorted health care-related stocks is HealthSouth Corp. ( HLS), an inpatient rehabilitation services provider with a short ratio of 40. In 2003, a fraud scheme sent shares plummeting. The company is slated to report its most recent quarterly results on May 7. The stock has a forward price-to-earnings (P/E) ratio of 33 and a P/E-to-growth (PEG) ratio of 6.6.

HealthSouth shares are owned by Highfields Capital Management, $8.3 billion hedge fund. Highfields also holds shares of Clear Channel Communications ( CCU), which has a 3 short ratio, Qualcomm ( QCOM), which has a 1.2 short ratio, and PNC Financial Services ( PNC), with a 3 short ratio.